Intangible assets include trademarks, patents, copyrights and trade names. Another common intangible asset is the remaining value of an acquired company that cannot be assigned to any physical, or tangible, asset. These intangible assets provide value to a firm in certain ways, and become used up systematically over a set number of years, similar to the concept of depreciation for tangible assets.
Determine which assets to amortize. Review a company's balance sheet, or if available, a detailed listing of assets. Only choose intangible assets with a defined useful life.
Determine the cost basis, or original cost, for each intangible asset. Many intangible assets that meet the requirements for amortization are purchased from another company. Generally, costs related to internally generated intangible assets must be expensed as the business incurs them, rather than amortized. Locate any legal contracts or purchase agreements that document the acquisition costs for each intangible asset. Consider any related legal fees from the acquisition as part of the purchase price of the intangible asset, and include them.
Determine the useful life of the intangible asset. This is defined by the Internal Revenue Service in Publication 535 as a maximum of 15 years for most intangibles, unless the useful life is dictated by legal terms. Patents, for example, have a legally defined life of 17 years, which may exceed their useful life. You must choose the shorter of the two, and amortization periods can never exceed 40 years.
Calculate the amortization by month. Companies must use the straight-line amortization method, unless the IRS accepts their reason for using another method. The straight-line method requires the total cost of the asset to be divided by the number of monthly periods in its determined useful life. Each month the appropriate amount of amortization is expensed on the income statement.
Record the transaction in the general journal. In the accounting books, an accountant debits, or increases amortization expense, an income statement account. He offsets this entry in one of two ways. Either he credits, or increases the accumulated amortization contra-account, or he directly credits, or decreases, the intangible asset balance account. Both of these accounts reside on the balance sheet. The accumulated amortization contra-account works as a deduction from the intangible asset's balance on the balance sheet.
Check your calculations. Verify that only one period of amortization expense shows on the income statement. Check the balance sheet to make sure the accumulated depreciation account balance or remaining intangible asset balance reflects the correct number of remaining months or years left to amortize.
- According to Financial Accounting Standards Board (FASB) no. 142 guidance, certain intangible assets may not be amortized if their useful life is indefinite. For example, a patent that contains renewal provisions may qualify as an indefinite life.
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